Wednesday, 4 April 2018

The Crowdcube story is a classic example of how not to grow your start up.

Crowdcube were the first but they have failed to capitalise on their first mover advantage. As yet another Crowdcube success fails, what is their next roll of the dice?

You have to give Darren and Luke, the founders of Crowdcube, a certain amount of credit for having the idea and getting it going. But that's where the credit must end.

PR can only paper over so many cracks before the walls cave in. Crowdcube is mainly PR - lift the hood and you find a cheap two stroke engine where the PR says its a gleaming V8. Proving the model worked was always going to be difficult. To work, we had to see exits and these take time - much longer than the fantasy figures provided in Crowdcube pitches. You dont expand your cost base unless you have evidence the model works - not if you want to succeed. They either couldn't wait or more likely didnt know this. So they led with PR and fell back on PR - it's all been a myth building exercise.

To illustrate, here is an article from 2017 in The Telegraph by James Titcomb - it opens....

Members of the public have invested more than £250m via Crowdcube, the crowdfunding website has announced.

The milestone comes after a number of businesses funded through the site have been sold, leading early investors to pocket huge gains.

Firstly the public have not invested more than £250m and they know it. Secondly you would have to look very hard for one of these lucky recipients of huge gains and even then, you would fail. It's simply PR put out by the boys and naively reprinted by a lazy journalist. Of course it does depend on your definition of 'huge'; a ploy CC use a lot. Ask CC's loyal investors and they would just cringe.

The main problem is that neither Darren or Luke have run anything successful - ever. They do not have that knowledge, despite what Darren claims in his CV. They have made mistake after mistake with Crowdcube, to the point where now, 7 years after they started, real progress has hit the buffers.

You cant blame them for trying but the really stupid part is repeating the same thing over and over again and hoping it will bring you different results.

The initial reaction to their launch and the first businesses was WOW - first adopters were enthusiastic. The business was small but grew rapidly - failures were slow to come through and they managed a couple of decent (not WOW) exits with Camden and ECar Club. They managed the situation very well - big news about the exits and very little information about the failures.

By 2015/16 however, there were no more exits and the failures began to mount up. People started asking if the hype around the pitches was just that. Darren and Luke introduced some new toys - mini bonds for example. This allowed them in future years to promote a return on investment figure - even though these were loans not investments in the equity sense - ie 'returns' were just the interest paid out on the bond. They didnt bother to distinguish as this would rather spoil the story.

These bonds came and went and we are now left with one company failure - Square Pie - where all bond holders lost their cash. Plenty of other companies that have used the Crowdcube bond have been struggling - The Eden Project, River Cottage, Chilango and Taylor St Baristas to name 4.

By 2016 Crowdcube as a company was accumulating very large losses, running at between £4m and £5m pa. It had in its own CC raises, created some ludicrous projections. In fact our records show that the Crowdcube projection to reality ratio or the PR ratio (!), is one of the worst for 500 companies we have records for. That says a lot.

Investors at this stage were still buoyant - still believing the PR issued that 'next year will be a very exciting one for Crowdcube'. You can take any year, the PR message is the same. Jam tomorrow.

By 2016/17 Crowdcube was burning through over £8m a year. They put their commission rate up from 4% to 7.5% but they were no way near to raising the required £100m plus per annum to get to break even. Despite the PR, their accounts will show more massive losses for 2017. Their backers are deep pocketed but there will come a time when they stop filling in ever larger holes.

And here's the rub. They are now running out of time. With no exits to talk about and investors becoming far more vary of the sorts of manipulation they have been guilty off, the funding for businesses is not growing at the required rate. We dont think they will ever get to BE. How many times can Luke say that next year is the one? We have a queue of failing companies on our radar - all funded via Crowdcube. Yes there are some we would expect to make a good exit but by the time investors have been diluted 6 times and had their 'rights' rewritten, what return they will is questionable

Their latest ploy is a good one - partnerships with various related companies outside of London. So for example a partnership with Scottish solicitors Harper Macleod is expected to pick up Scottish business. According to their own PR, this will double their deal flow. Well it may increase the number of attempted pitches, but will it really increase the investment stream - they only make money on completed deals? We doubt it - it has come too late. Harper Macleod may not have done much research into Crowdcube. They fell for the PR. Their clients wont be pleased. Investors we speak to have moved on to other platforms, ones that take a much more professional and holistic approach. This is the way forward. Crowdcube fund you and ditch you - investors have to look after themselves; the platform takes zero responsibility for the information it publishes. Which is fortunate, as they might have been sued otherwise. But that model simply doesnt work. Investors tell us this and the number of failures and zombies funded via Crowdcube endorses it.

The only answer for Crowdcube is to get at least one large exit - a X10 job. And it has to be in 2018. They have lost their first mover advantage and in the hands of Darren and Luke it turned out to be a disadvantage. Funding hopeless companies using fantasy projections is never going to create a sustainable business - for anyone. Even with S/EIS.

There are one or two possible exits. One has a targeted IPO for this year but Crowdcube were only involved in a very small way - Seedsr will get this credit. Others have 'exited' early, much the same as Camden, forcing CC SHs to sell up and greatly reducing their returns. Many have gone bust or are doing nothing. The return is very poor. You cant hide that forever, even by mixing in bondholders percentages.

Having bigged themselves up so much for 7 years, it looks likely that Darren and Luke will be hoist on their own petards. When people told them that their model wouldnt work, they would have done well to listen.

8 comments:

Hmm, well I'd love a deep dive analysis into what the hell happened if they do. Sarah as communicative as ever..! Reigning days were signed (?) by Marshall so no idea what kind of deal shareholders got out of that. Completely baffled by the way it was run.

On your point about Crowdcube being the first to market with crowdfunding, the story I heard is that Seedrs and CrowdCube were neck and neck in the race to be first to launch. Both were waiting on FCA authorisation (or was it still the FSA back then...?) before they could actually launch.

Crowdcube decided to gamble and launched before they actually had their authorisation through, whilst Seedrs waited until they had the OK from the regulator. Luckily for Crowdcube they did get the authorisation through, but it showed a willingness to bend the rules right from the beginning...

The story is far more interesting than that ANON - Crowdcube never planned to get FSA authorisation. If you look at the old records, Crowdcube set up a weird and debatable structure to get around the rules. Seedrs then appeared in the market with the right authorisation by the FSA, which forced Crowdcube to apply for the authorisation as well but with the homework done by Seedrs. Unfortunately by the time Seedrs came to market, Crowdcube was already ahead and still is.

I think you are rather optimistic Rob... Surely it is going to take a lot more than one or two 10X exits this year to save this situation. The sheer number of businesses that have 'successfully' raised requires that there should be a few decent exits per month (now we are 6 ish years in) for the investor base to have anything like the returns that were trumpeted...

In my view and agreed with by friends who also have invested in / follow crowdcube the real mistake crowdcube made was not the model itself - more the communication of what it was.. Is crowdcube a marketplace like ebay where essentially you are left to you own devices as an investor or was is a carefully curated and vetted list of great opportunities. As we know the reality is when something good (ish) happens they shout their heads off about it as if they are the only reason the business worked out but you hear nothing when something goes wrong. I think the truth is that they will have swung around trying to work out which approach would be best leaving us investors clueless as to which position they are in. Either approach would have probably worked - but the lesson should be that you should pick an approach and stick to it and articulate it honestly.

Yes agreed - and thats down to Luke's and Darren's lack of experience with start ups. Expectation management is crucial. They started with the 'carefully selected for you' idea (in their PR) but delivered sh1t. Now that they are still delivering sh1t, they have changed to - help yourselves we dont vet anything. Although if you listened to Luke Lang giving advice to the Treasury Comm in the HoC recently, he stated that all of their pitches were vetted carefully by their 'team'. We can only assume the team is in fact the creche were their workforce leave their siblings.

I do think that even at this late stage, one really big exit will hold the axe. Time will tell. We have what looks like a big failure in our sights first!!